Last month, the High Court gave its judgment in this tripartite dispute between the Claimant “A”, a retailer, its auditor “B”, and B’s regulator, the FRC. In the course of an investigation into the audit of the company’s 2018 financial statements, the FRC sought disclosure of documents from B over which A asserted legal professional privilege.
The judgment provides welcome clarification on the legal procedure to follow when the FRC seeks disclosure of documents in the hands of its auditor, which the audit client claims are privileged. The decision follows the Court of Appeal Decision in Sports Direct International plc v FRC [2020], which we commented on here and which held:
“The recipient [i.e. the auditor under investigation] of a notice given by the FRC under paragraph 1(1) or 1(3) is not required to hand over privileged documents, whether the person entitled to the privilege is the auditor under investigation or the auditor’s clients.”
Background
As part of its investigation of B’s audit work of A, the FRC sought documents from B, exercising its statutory powers under SATCAR. The statutory notice served on B required it to hand over its audit file for the 2018 audit, which included documents that A asserted were covered by privilege.
A objected, seeking a declaration that B should not hand over documents to the FRC which
A asserted were privileged.
B risked civil and criminal consequences if it failed to comply with the FRC’s statutory notice “without reasonable excuse” and issued a counterclaim against A to determine whether the documents in question were indeed privileged.
The FRC made clear that it did not require B to provide it with material which is subject to legal professional privilege and argued the declarations sought were unnecessary; what mattered was determining whether the documents were privileged, and that was a matter as between A, the audit client, and B, its auditor.
Judgment
The court agreed with the FRC and found that what was important was determining whether the documents were privileged. The appropriate parties to determining that question were the audit client and its auditor and that a declaration as to whether B should withhold disclosure of documents over which privilege was asserted did not address this key question.
If A wished to prevent disclosure to the FRC, it could seek an injunction against B, its auditor.
Alternatively, if A chose not to do so and B was still concerned over facing a claim from its audit client for handing over confidential, privileged documents to its regulator, it could protect its position by seeking a declaration that the documents are not privileged and may be disclosed.
Either route would put the relevant documents before the court to determine the all important question: were the documents privileged? If they were privileged, the auditor would not be obliged to hand them over to the FRC under the statutory notice.
As for the danger that an audit client might not know its confidential documents were about to be handed over the FRC, that was, according to the court, addressed by the fact that auditors are “likely” to be under a duty to their audit client to tell it about a statutory notice requiring it to hand confidential documents over to the FRC.
Comment
Following the Court of Appeal’s decision in Sports Direct, an auditor is not required to hand over privileged documents on its audit file to the FRC when investigated.
We hope that audit clients take comfort from this decision, and from the Sports Direct decision, that if they hand over privileged documents to their auditor they do so without risking their disclosure to a regulator if the auditor is investigated by the FRC. This is important because an auditor’s job would be compromised if an audit client felt it could not do so.
Procedurally, this case has clarified that an audit client keen to retain confidentiality over privileged documents on its auditor’s audit file must seek an injunction if it wishes to prevent their disclosure to the FRC.
For auditors, they should note the finding in this decision that the auditor is “likely” to be under a duty to inform its audit client of any FRC Notice requiring disclosure of the audit client’s confidential and privileged documents. In our view, auditors under FRC investigation, having informed the FRC of their intention to do so, should seek to comply with their duty and proceed to inform the audit client of such notice.
